Wednesday, November 22, 2017

Most analysts think that Moody's upgrade is merited by the raft of reforms we have seen under the Modi government. I disagree. It's certainly true that the reforms have improved India's economic fundamentals. They have brightened the prospects of India growing at over 7.5%. But, I would argue that, even without the reforms, India's ability to service its debt has not been in doubt. In 2007- 17, which is a period consequent to the global crisis, we have seen a decline in India's debt to GDP ratio in the face of an adverse external environment. I would, therefore, argue, that this record merited an upgrade even without the reforms we have had recently.

If there is one economic measure which will make a difference to India's growth prospects in the near future, it is the massive bank recapitalisation package. Demonetisation will yield results but only over a long period. GST is hugely positive but only over the medium term. With bank recapitalisation, we can almost see an "announcement effect"- an impact almost immediately after announcement. One obvious impact is the rise in the prices of public sector bank shares. But also, as the package gets finalised, we can see a little more boldness in lending on their part.

The package is indeed massive and it required guts for the Modi government to announce something of this magnitude. My only regret is that it didn't happen much earlier.